Docket: 2009-3570(IT)I
BETWEEN:
ALAIN-PIERRE HOVASSE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on January 20, 2011, at Vancouver, British Columbia.
Before: The Honourable
Justice Robert J. Hogan
Appearances:
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Counsel for the Appellant:
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Vincent
Pigeon
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Counsel for the Respondent:
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Jonathan Wittig
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____________________________________________________________________
AMENDED JUDGMENT
The appeal from the reassessment made under
the Income Tax Act for the 2007 taxation year is allowed, without costs,
and the matter is referred back to the Minister of National Revenue for
reconsideration and reassessment in accordance with the attached amended reasons
for judgment.
The amended judgment and amended reasons
for judgment are issued in substitution for the judgment and reasons for
judgment dated March 4, 2011.
Signed at Ottawa, Canada, this 16th day of April 2011.
"Robert J. Hogan"
Citation: 2011 TCC 143
Date: 20110416
Docket: 2009-3570(IT)I
BETWEEN:
ALAIN-PIERRE HOVASSE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Hogan J.
[1]
The Appellant in this
case is appealing the decision of the Minister of National Revenue (“Minister”)
to deny $7,000 in deductions for support amounts paid in the 2007 taxation
year. The dispute revolves around whether or not the Appellant made those
payments pursuant to a written agreement, as required by subsection 56.1(4) of
the Income Tax Act (“ITA”).
The Appellant argues that a “Summary of Mediated Agreements” resulting from
mediation sessions is sufficient to satisfy the written agreement requirement
of that provision. The Respondent contends that the document in question cannot
satisfy that requirement since it was not intended to be a final and binding
agreement between the Appellant and his former spouse.
Factual Background
[2]
The Appellant and his
former spouse, Diane Lu-Affatt, married on July 17, 1983. They separated
in December 2005, and have remained apart since then. In August 2006, the Appellant
entered into mediation with Ms. Lu-Affatt. The result was an agreement
that, among other things, the Appellant would make spousal support payments of
$1,000 per month for 11 months starting in September 2006.
[3]
The Appellant made the
payments as agreed. He filed his 2007 tax return, deducting $11,000 in spousal
support payments. On November 10, 2008, the Minister disallowed the
deduction in an initial assessment. On January 19, 2009, the Minister reassessed
and allowed the deduction of $7,000 of the support amounts previously claimed,
but this reassessment was reversed on June 15, 2009. Eventually, the Appellant
filed a notice of appeal with this Court on November 20, 2009.
Analysis
[4]
In general, Canadian
tax law prevents spouses from splitting income in such a way as to produce lower
overall taxes. There is, however, an exception in subsection 56.1(4) and paragraph
60(b) of the ITA. In these provisions Parliament has created a
scheme by which certain support amounts paid to a separated spouse are deductible
from income by the payer and taxable in the hands of the recipient. As Heald J.
indicated in Hodson v. The Queen,
these provisions are also designed in such a fashion as to prevent abuse thereof:
. . . spouses who live together are not allowed to split
their income thereby reducing the total tax bill of the family. Paragraph 60(b)
provides an exception to that general rule and confers upon separated spouses
who come within its terms and conditions certain tax advantages. Parliament has
spoken in clear and unmistakable terms. Had Parliament wished to extend the
benefit conferred by paragraph 60(b) on separated spouses who, as in
this case, do not have either a Court order or a written agreement, it would
have said so. The rationale for not including separated spouses involved in
payments made and received pursuant to a verbal understanding is readily
apparent. Such a loose and indefinite structure might well open the door to
colourable and fraudulent arrangements and schemes for tax avoidance. . . .
[5]
The above summary shows
that the requirements in subsection 56.1(4) are there to prevent the mischief
of abusing support payment provisions in order to split income. These
requirements are currently found in the definition of “support amount” in subsection
56.1(4) of the ITA, which states:
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56.1(4)
Definitions — “support
amount” means an amount payable or receivable as an allowance on a
periodic basis for the maintenance of the recipient, children of the
recipient or both the recipient and children of the recipient, if the
recipient has discretion as to the use of the amount, and
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56.1(4)
Définitions — « pension alimentaire » Montant
payable ou à recevoir à titre d’allocation périodique pour subvenir aux
besoins du bénéficiaire, d’enfants de celui-ci ou à la fois du bénéficiaire
et de ces enfants, si le bénéficiaire peut utiliser le montant à sa
discrétion et, selon le cas :
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(a)
the recipient is the spouse or common-law partner or former spouse or
common-law partner of the payer, the recipient and payer are living separate
and apart because of the breakdown of their marriage or common-law
partnership and the amount is receivable under an order of a competent
tribunal or under a written agreement;
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a) le bénéficiaire est l’époux ou le
conjoint de fait ou l’ex-époux ou l’ancien conjoint de fait du payeur et vit
séparé de celui-ci pour cause d’échec de leur mariage ou union de fait et le
montant est à recevoir aux termes de l’ordonnance d’un tribunal compétent
ou d’un accord écrit ;
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[Emphasis added.]
[6]
The issue in this case
is whether the written agreement produced by the Appellant is sufficient to
satisfy the requirements of the ITA. The parties presented a Joint Book
of Authorities to the Court. Most of the cases contained therein deal largely
with whether an agreement evidenced in writing satisfies the requirements of subsection
56.1(4).
They provide guidance on how to determine if a written agreement is sufficient.
What this determination involves was summarized succinctly by my colleague
Hershfield J. in Shaw v. The Queen.
[7]
In that case, Hershfield
J. held that what is needed is evidence that the parties intended to be legally
bound by the obligations they have set down in writing. A signature is one way
to prove this, but not the only way. The evidence required in this regard will
be dependent on the facts in each case.
Hershfield J. further held that written agreements need not be signed in order
to comply with subsection 56.1(4), and he rejected the argument that Parliament
intended a very strict application of the written agreement requirement. A
strict interpretation is not needed to give effect to the purpose behind allowing
the deduction of support amounts. However, for a finding to be made that a
written agreement is compliant with that section, some level of formality is still
required. As Bowman A.C.J., as he then was, stated in Foley v. R., at paragraph 26:
“The word ‘agreement’ denotes at least a binding obligation.”
[8]
Therefore, what is left
to decide is whether the evidence as a whole shows that the Appellant, in
entering into the mediated agreement, agreed to be obligated to make the
support payments. This element must be present in order to satisfy the
requirements in the ITA for the deductibility of support amounts and to
prevent the mischief of the Appellant enjoying, through income splitting, a tax
benefit to which he would not otherwise be entitled.
[9]
In light of the
testimony of the Appellant at trial, and the documentation from the mediation
sessions that was presented, the mediated agreement amounted to an interim
agreement setting out an obligation to pay a specified amount of support
periodically. This is confirmed by the Appellant’s adherence to the schedule for
the payment of the spousal support amount under the agreement. The testimony of
the Appellant also shows that the mediation sessions ended with a final
agreement that both parties intended to adhere to. Further, the final agreement
negotiated between the parties in the spring of 2010 confirms that the payments
by the Appellant were made pursuant to a written agreement requiring that these
payments be made.
[10]
The Respondent put
forward many arguments against such a finding, which deserve consideration.
First, it was argued that since the mediated agreement is not signed, it is not
valid. Shaw and Foley both reject this argument. While
Interpretation Bulletin IT-530R (Support Payments) of the Canada Revenue Agency suggests that
the Minister will not normally accept such agreements if not signed, that is
only the Minister’s policy (contradicted by case law) and is not binding on
this Court. This is moreover reinforced by the fact that there is no express
requirement in the ITA that the agreement be signed. If Parliament had intended
that the written agreement should be signed, it could have easily said so.
[11]
The Respondent also
argued that the mediated agreement contained a warning that it could not be
construed as a contract or court judgment, meaning it was not intended to be
binding. This does not necessarily mean that the parties could not have
intended or did not intend to be bound by the agreement. The statement seems to
be more of a notification that further steps were required in order for the
agreement to be enforceable in a court of law. The parties may not have filed
the agreement with a court having jurisdiction in that regard, as advised, but
the Appellant gave a reasonable explanation for not doing so, stating that he
and his former spouse wanted to avoid legal costs.
[12]
Further, the Respondent
submitted that the conduct of Ms. Lu-Affatt shows that the written summary
of mediated agreements was not an agreement. The Respondent noted that Ms. Lu-Affatt
asked for a greater support amount in a motion to institute divorce proceedings.
However, this does not show an absence of a written agreement. At most, it is
proof that the agreement was a temporary one pending divorce proceedings. Such interim
agreements are perfectly acceptable as long as they otherwise meet the requirements
under the ITA. Furthermore, orders regarding support amounts are rarely,
if ever, final. They are almost always subject to variance in the jurisdiction
in which they are made. If a lack of finality is grounds to dismiss a written
support arrangement under subsection 56.1(4), one could conceivably dismiss
every single written agreement ever made and court order ever issued for
support, which would render the section redundant.
[13]
Secondly, Ms. Lu-Affatt
stated in a notice of objection to the Minister that there was no official
written agreement between the Appellant and herself. That document is
problematic in that it makes reference to there being no written agreement, but
it does not state whether she is speaking of an official agreement on the requirement
to pay spousal support and the amount thereof, or referring to an agreement whereby
she would be taxable on the amounts paid. Without having been able to hear Ms.
Lu-Affatt’s explanation of what she meant in that document, it is hard to
ascertain exactly what it proves, and the document should therefore be given
little weight in deciding this case.
[14]
In the present case,
there is little to indicate that the Appellant is trying to abuse the relevant
part of the ITA by seeking to split income between him and his former spouse. Rather, the
evidence and testimony of the Appellant indicate, on the balance of
probabilities, that he and Ms. Lu-Affatt were separated at the time he was
making the periodic payments pursuant to what was understood by both parties to
be a binding obligation. Further, the evidence shows that they separated and have
remained separated with the intent to divorce and that they no longer have the
economic benefit of a unified household. These are the circumstances in which Parliament
intended that paragraph 60(b) and section 56.1 would operate.
[15]
For the foregoing
reasons, the appeal is allowed and I conclude that the Appellant is entitled to
a deduction of $6,000 for support payments made to his former spouse in
2007. As agreed to by the parties at the hearing, this amount excludes the
payment of $1,000 made in July 2007, since it was made after the termination
date of the mediated agreement. The reassessment is referred back to the
Minister for reconsideration and reassessment in accordance with these amended
reasons for judgment.
Signed at Ottawa, Canada, this 16th
day of April 2011.
"Robert J. Hogan"
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